3月1日，Global Times刊发上海交通大学上海高级金融学院金融学教授、中国金融研究院副院长钱军教授关于G20峰会的评论文章Global economy doesn’t need Plaza Accord。
 
 

Global economy doesn’t need Plaza Accord

At the top of China’s to-do-list is to share with other nations and global markets its policies with regard to currency, capital markets and the overall economy.

By Qian Jun Expectations that major global players might reach an agreement for joint currency intervention akin to the 1985 Plaza Accord have strengthened recently. Although China, host to the two-day G20 meeting of finance ministers and central bank governors, which concluded on Saturday in Shanghai, dismissed the idea and there was no such deal clinched at the meeting, this illusion seems to persist. So is a new Plaza Accord feasible under the current circumstances?

Before answering the question, we need to take a look at the background under which the Plaza Accord was signed over 30 years ago. During the five years leading up to 1985, the US dollar strengthened more than 40 per- cent against other major currencies, especially the Japanese yen and Deutsche mark, for various reasons. The rise in the dollar’s value caused many problems, especially for the US.
For instance, the dollar’s appreciation resulted in record-high trade deficits for the US, which reached a then astronomical figure of $120 billion. In response, the US Congress tabled various trade protection measures against its major trade partners. What the Plaza Accord accomplished was to avoid trade wars through direct, coordinated intervention in the currency markets among major developed countries and save the US and world economy from further deteriorating.

The accord, led by the US and signed with four other major industrialized nations – Japan, Germany, Britain and France – brought the dollar value down against the yen and mark by 40 percent during the two years after the deal was signed.

To this day, many economists from Japan and other Asian nations believe that the Plaza Accord sabotaged the Japanese economy, because as the yen appreciated, Japanese firms lost their international competitiveness. The stronger yen also led to a global investment frenzy by Japanese firms and investors, and helped create asset bubbles in Japan, especially an enormous real estate bubble.

Discussion of a new plan similar to the Plaza Accord may be necessary at some point, but it would be almost impossible to achieve the same result at the moment.

The current global financial system is much more complicated and diversified than before. In addition, nations can implement macroeconomic policies via unconventional monetary policies, most notably quantitative easing (QE), in order to rescue the financial system from crisis and stimulate the economy. Such monetary policies are not regarded as direct intervention in the exchange market. But the likely outcome of these policies is to drive down the value of the local currency against all other major currencies. This has been seen in the US, Japan and the eurozone.

As for China, the yuan has depreciated against other major currencies, especially the dollar, since the second half of last year.

But I don’t see the yuan’s depreciation as “manipulation of the ex- change rate” or “competitive devaluation” as some international observers have said. China is not waging a currency war. The People’s Bank of China (PBC), China’s central bank, announced changes in how the yuan’s value is determined on August 11, 2015, to move toward a market-oriented system. The move was in line with the requirements for reserve currency status, with the yuan being included in the IMF’s Special Drawing Rights (SDR) currency basket shortly afterward. A more market-based exchange rate sys- tem may lead to greater fluctuations of the yuan in the short term but will also guide the currency’s value toward the market equilibrium level.

Meanwhile, the PBC stated at the end of last year that the yuan’s exchange rate will be determined with reference to a basket of currencies, not just the dollar. With these changes and reforms and market forces in play, it is not surprising to see the yuan depreciate against the dollar, but there is no basis for further large depreciation against other major currencies, such as the euro and yen.

There might be some international investors who will try to short the yuan in the offshore markets, and further capital outflows from China are also likely. But I have full confidence in the Chinese central bank’s ability to avoid panicky capital flight. With its rich experience and abundant foreign currency reserves (about $3.2 trillion, the largest in the world), the central bank can coordinate with financial institutions in both the offshore and onshore currency markets to stabilize the exchange rate movements and the country’s capital account, if necessary.

The PBC and other policymakers and regulators need to communicate better and more regularly with global markets regarding the status of China’s financial system and its toolbox for fixing potential problems. With more transparency and symmetric information, global investors and governments will have more confidence in China’s financial system, including the yuan’s exchange rate regime.

So long as the risk of capital flight is under control, China should continue along its path toward more market- based reforms and further opening up its capital account. Moves by the country to further liberalize its capital account won’t and shouldn’t be stopped.

At the top of China’s to-do-list is to share with other nations and global markets its policies with regard to currency, capital markets and the overall economy. Better and more frequent communication can improve the world’s confidence in China’s financial system and economy.

Confidence is crucial for a stable global financial system, and a loss of confidence can result in panicky moves and crises, even if the fundamentals are not that bad. Once again, the best way to boost market confidence is to communicate with global markets more frequently.